Dollar Rises on Hawkish Fed Comments as Stocks, Commodities Fall

(Bloomberg) -- The dollar strengthened versus all of its major peers, while Asian stocks and commodities retreated as hawkish comments from a Federal Reserve official boosted the likelihood of a U.S. interest-rate rise this year.

Bloomberg’s dollar index rose to a one-week high after Fed Vice Chairman Stanley Fischer said Sunday the U.S. economy is already close to meeting the central bank’s goals and that growth will pick up. The MSCI Asia Pacific Index of shares dropped to a two-week low and futures foreshadowed losses in U.S. and U.K. equities. Japanese stocks advanced after Bank of Japan Governor Haruhiko Kuroda flagged the possibility that the authority’s unprecedented monetary stimulus will be added to in September. Oil fell to about $48 a barrel and silver led losses among precious metals.

Global markets have been buffeted over the past week by comments from Fed officials flagging the possibility of higher borrowing costs as early as next month, even though minutes of the central bank’s last meeting struck a more dovish tone. The focus will shift to Janet Yellen’s speech this week at a gathering of global central bankers in Jackson Hole, Wyoming. Futures traders on Friday assigned a 22 percent probability to a September rate increase by the Fed, up from 16 percent a week earlier.

“Janet Yellen’s speech on Friday will have the biggest impact on short-term market moves, especially if she follows in Stanley Fischer’s relatively hawkish tone,” said Angus Nicholson, a market analyst at IG Ltd. “A week of talking up the U.S. dollar will be good for U.S. financial stocks that would benefit from a rate rise and some of that positivity could spread over into financials globally.”

Currencies

Bloomberg’s Dollar Spot Index rose 0.5 percent as of 1:11 p.m. Tokyo time, after losing ground in each of the last two weeks. South Korea’s won fell 0.9 percent versus the greenback and New Zealand’s dollar lost 0.8 percent, the biggest declines among 16 major currencies.

“We expect the dollar to consolidate this week with a modest upside bias,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney. “There is room for U.S. interest-rate expectations to adjust a bit higher this week.”

The yen dropped 0.6 percent to 100.84 per dollar. Kuroda told the Sankei newspaper that the BOJ is conducting a comprehensive review of Japan’s economy and finances and said there is "sufficient chance" of more easing at next month’s policy meeting. Softer July inflation data this Friday may raise odds for more aggressive BOJ easing, Haddad said.

India’s rupee weakened 0.2 percent after India named Urjit Patel to take over from Raghuram Rajan as central bank governor from Sept. 4. The currency slipped to its weakest level this month, while China’s yuan fell to a two-week low and Indonesia’s rupiah dropped back to about where it was at the end of June.

Stocks

Japan’s Topix index added 0.5 percent as the yen’s decline boosted exporters including Toyota Motor Corp., which was headed for its highest close since March.

The MSCI Asia Pacific excluding Japan Index slid to a two-week low, led by losses in energy companies and raw-materials producers. BHP Billiton Ltd. retreated from a nine-month high in Sydney and Cnooc Ltd., China’s biggest offshore oil and gas producer, fell as much as 2.4 percent in Hong Kong.

South Korea’s Kospi index slipped from a 13-month high as foreign investors pulled funds from the securities, after injecting more than $5 billion since the start of this quarter. Taiwan’s benchmark was set for its lowest close in a month and Hong Kong’s Hang Seng Index extended Friday’s retreat from a nine-month high.

Futures for the S&P 500 Index fell 0.2 percent after the gauge ended last week within 0.3 percent of an all-time high. Pfizer Inc. is close to an agreement to buy Medivation Inc. for about $14 billion and a deal may be announced as early as Monday, according to people familiar with the situation. Futures on the U.K.’s FTSE 100 Index were also down 0.2 percent.

Commodities

The Bloomberg Commodity Index declined 0.5 percent, after slipping from a one-month high in the last session.

Crude oil declined 0.9 percent to $48.09 a barrel in New York after Iraq, OPEC’s second-biggest producer, said it will boost exports by about 5 percent in coming days. The price jumped 9.1 percent last week on speculation that OPEC talks next month could lead to an output freeze. U.S. drillers added rigs for an eighth week, the longest run since April 2014, Baker Hughes Inc. data show.

Silver dropped as much as 3 percent to a seven-week low, while gold was down 0.5 percent amid the dollar’s advance. Silver has rallied 37 percent this year while gold jumped 26 percent as the Fed refrained from tightening and other central banks embraced negative rates, benefiting bullion which doesn’t pay interest.

Bonds

The yield on two-year U.S. Treasuries climbed three basis points to a two-month high of 0.78 percent following Fischer’s remarks, which were made after New York Fed President William Dudley said last week that the market was underestimating the likelihood of policy tightening.

“The most recent lot of Fed speakers -- and these are key speakers -- have signaled that the market should be putting a greater weight on the risk of a move before year-end,” said Su-Lin Ong, a senior economist at Royal Bank of Canada in Sydney. “Markets have reacted accordingly: yields have moved higher, the dollar is also firmer. The market is clearly susceptible to Yellen making similar comments in Jackson Hole.”

The 10-year Treasury yield increased by two basis points to 1.60 percent. Ong said it could climb toward 1.70 percent if Yellen’s remarks on the economy are along the lines of those made by Fischer when she delivers her address on Friday.

Australia’s 10-year bond yield increased by five basis points to 1.91 percent and Japan’s rose by one basis point to minus 0.08 percent.

--With assistance from Kevin Buckland To contact the reporters on this story: James Regan in Hong Kong at jregan19@bloomberg.net, Narayanan Somasundaram in Sydney at nsomasundara@bloomberg.net. To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net, Garfield Reynolds